Israeli Economic Growth: How It Went Wrong

The State of the Nation report on Israeli society, economics and policy is in places an alarming read, and not just because of what it reveals about the extent of poverty, economic inequality and Israel's abysmal education system.

The State of the Nation report on Israeli society, economics and policy is in places an alarming read. The book, compiled by Dan Ben-David, a professor of economics at Tel Aviv University and executive director of the Taub Center for Social Policy Studies in Israel, contains a number of graphs. In this series of brief articles, we look at these graphs one by one.

Graphic presentation makes it easier to understand the underlying data, leading us to a better understanding of the state of the Israeli economy relative both to the past and to other countries' economies. Ben-David debunks some myths about Israel's economic might, pinpoints the challenges we face and suggests ways to contend with them.

The first graph relates to domestic economic growth from a historic perspective.

Upon its establishment in 1948, Israel had 806,000 people. Not long afterward, a period of austerity and rationing began, and meanwhile, the population grew. By the end of 1960, Israel's population had reached 2.15 million, of whom 970,000 were immigrants.

During that time, the nation was shaken time and again by war and violence, yet growth was not neglected. The government invested heavily in both physical infrastructure and human capital, including by establishing seven universities.

The result was that from 1950 to 1972, Israeli economic growth was extraordinarily fast. GDP per capita (gross domestic product divided by the population ) averaged 5.5% a year, more than double the rate in the West at that time. Growth was so rapid that while in 1950, the standard of living in the United States was 128% higher than it was in Israel, by 1973, the gap had narrowed to 39%.

But as the graph shows, that was the turning point. From 1973 on, the pace of growth in GDP per capita significantly slowed. If the pace achieved in 1950 to 1972 had been sustained, Israel today would have one of the highest standards of living in the world. As it is, the gap in the standard of living between the West and Israel has widened.

The characteristics of the period since 1973 include slow-growing labor productivity, an increasing incidence of families living in poverty, worsening inequality in the distribution of income and increasing welfare payouts per capita.

There are several reasons for the relative decline, Ben-David says. One is neglect of human capital. Elementary and high-school education have deteriorated and now yield the lowest achievement levels in the West. No additional research universities have been built. The number of senior faculty positions at the flagship universities (the Hebrew University of Jerusalem and Tel University ) is lower today than 35 years ago. The Technion has only one more position than in 1973.

Another reason is neglect of physical infrastructure, notably transportation. Israel today has half the number of vehicles per capita than in the OECD, but the roads are three times more congested.

A protracted pullback in the standard of living, growing poverty and unequal income distribution are not sustainable over time, Ben-David says: The more the state systematically neglects to narrow inequality and tackle poverty at its source, the more welfare it has to pay.

The next article will discuss economic growth after 1973 and long-term growth in the U.S.

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